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The Netflix apology: good idea, bad execution
Posted 21 September 2011 13:28pm by Sean Flynn
As we’ve seen time and time again, even the highest-flying companies can be thrust into crisis and controversy in an instant for a variety of reasons.
For BP, it was a massive oil spill. For AirBnB, it was an ugly incident involving theft and vandalism.
And for Netflix, which is in the midst of a crisis today, the cause of its problems was a decision to change its business model.
That change, of course, forces consumers who had previously received DVDs by mail along with digital streaming to choose one, or pay significantly more for both.
Not surprisingly, this structural change (and effective price increase) sparked criticism from customers, many of whom vented their disappointment (and outrage) online. Many unhappy customers went so far as to state that they’d be canceling their subscriptions if Netflix didn’t reconsider its plans.
Last week we learned that some of them are apparently following through on their threats, as Netflix announced that it expects to see a drop in subscribers in the third quarter. Wall Street didn’t react favorably, and Netflix stock sold off sharply. All told, it plunged nearly 40% in a matter of days.
That led Netflix CEO Reed Hastings to take to the Netflix Blog on Sunday and publicly apologize for his company’s handling of its changes.
In many cases, an apology is a good step a company can take early on to make amends for its mistakes and start the healing process. But unfortunately, Hastings’ blog post has only deepened the crisis he faces.
Apologies: the devil is in the details
Not all apologies are created equal, and not all deliver the desired outcome. That may prove to be the case with Hastings’ apology, which starts off on the right track but ends poorly.
In short, Hastings made one fatal mistake in his apology: he assumed that Netflix customers were primarily upset because Netflix hadn’t explained its changes well enough to them.
He wrote:
In hindsight, I slid into arrogance based upon past success. We have done very well for a long time by steadily improving our service, without doing much CEO communication. Inside Netflix I say, “Actions speak louder than words,” and we should just keep improving our service.
But now I see that given the huge changes we have been recently making, I should have personally given a full justification to our members of why we are separating DVD and streaming, and charging for both.
He goes on to explain in detail why Netflix felt the need to separate Netflix’s DVD and streaming offerings into two distinct subscriptions, and to charge ‘full price‘ for both.
The problem, however, is that Netflix customers don’t need a bunch of MBA and marketing speak to understand why Netflix did what it did. Many did understand the rationale, but even for those that don’t, the fact remains: customers simply didn’t like change.
In trying to explain to customers why the change made sense for Netflix, he failed to explain why it made sense for its customers.
Don’t apologize for one big mistake, and then make another
Providing a company-centric (as opposed to customer-centric) apology was bad enough, but Hastings made the situation even worse by announcing an even more drastic change: the complete separation of DVDs by mail as a new service, Qwikster.
Not only does this change not address the customer complaints, it created new ones. For instance, because Netflix, which is now streaming-only, and Qwikster are separate services, customers who previously had one account and one bill will now maintain two different accounts and see two separate charges if they choose to subscribe to both services.
In other words, Hastings used his apology to let Netflix customers know that he’d be making their lives even more difficult.
Apologies work best when you listen
In the final analysis, Hastings’ apology has been poorly-received for one reason: he believes that his problem is a result of his failure to talk more to Netflix customers when, in fact, his problem is a result of his failure to listen to them.
Now that the original Netflix is Qwikster and the new Netflix is Netflix, it’s arguably too late for Hastings to issue the type of apology that works: one in which customer concerns are addressed substantively.
There’s good news
So is Netflix, for lack of a better word, screwed? Not necessarily.
The good news for the company is that you don’t always need to apologize (or apologize well) to be forgiven. If Netflix can convince customers (and former customers) that Netflix and Qwikster are worth what Netflix is charging for them, it can still earn and regain their trust and patronage.
The bad news, of course, is that that Netflix won’t be able to mend its relationship with customers nearly as quickly as it hurt them.
How to Set a Marketing Budget for Your SMB
Posted By Sean Flynn
September 24, 2011
One of the most important decisions that a Small and Medium-size Business (SMB) has to make is how much money to allocate for the marketing budget. Prospects often ask, “How much should I spend on marketing?”
The answer: “It varies by industry and business size.” It is also based on how much you want to grow, and how fast. Both the Counselors to America’s Small Business (SCORE) and the U.S. Small Business Administration (SBA) define the variable for a proper marketing budget to be between 2% and 10% of sales, noting that for B2C, retail and pharmaceuticals can exceed 20% during peak brand-building years.
Most companies under spend on their marketing budgets, thinking that to not spend is to save. This quite simply isn’t true. You’ve heard it before, and it bears repeating: You have to spend money to make money. The trick is to spend your money wisely on a tailored marketing plan aimed at fulfilling your company’s goals. Keep in mind that your marketing efforts have a direct bearing on your revenue, so now is not the time to be penny wise and pound foolish.
Budget-setting guidelines
Two main things should be considered when setting a marketing budget:
- The development or refinement of the brand and the channels used to promote the brand. These include logos, Web sites, blogs, e-mail campaigns, sales presentations, brochures, ads, etc.
- The ongoing expense of promoting and advertising your brand to your customer base and your prospects.
For most SMBs, the percentage of revenue dedicated to a marketing budget is determined by industry and size. But, in general terms, here is some information we have put together based on several creditable sources.
| Revenue | Marketing Budget |
|---|---|
| Less than $5 million | 7–8% |
| $5–10 million | 6–7% |
| $10–100 million | 5–6% |
| $100–300 million | 3–5% |
| More than $300 million | 3-4% |
An important consideration
(Adjust for Industry!)
Every industry is different, so companies that sell to specific government branches or one that has an ultra-specialized niche may be able to deduct 1–2% from the above figures. If your company is B2B or B2C, you may need to raise your budget by 1–3% to see solid results. Retail and pharmaceuticals lead the spending, with many of these companies spending more than 20% of net sales. The overall average is reported to be 4–6%. Many other circumstances will merit an increase or reduction in your marketing budget as a percentage of revenue. Feel free to contact us to discuss this, or visit http://www.sba.gov/smallbusinessplanner/index.html.
NEW! Adjustment!
Many of you have reached out with various questions and concerns, thank you for your feedback! One point for consideration is that most of the above guidelines are based on revenue models that average 10-12% net revenue. (After marketing costs, marketing is a CODB) Some organizations run on MUCH higher gross and very small net….making the above guidelines inaccurate. I recommend two adjustments.
- Look at what your competitors that are market leaders are spending and create a budget accordingly. (tough to determine)
- Take a larger percentage of net revenues as opposed to gross revenue. In the end your marketing budget should be properly allocated to position your organization, trump the competition, raise awareness, generate quality conversion and of course increase revenue growth!
Here is a great quote from SCORE: “Often, small businesses estimate their sales revenue, cost-of-goods, overhead and salaries, and then gross profit. Anything left is considered available funds for marketing support. That’s not such a good idea. … If you are the new competitor in the marketplace, you will have to spend more aggressively to establish your market share objective.”
You can find the complete article at http://www.score.org/m_pr_11.html.
Can I still grow my company with “baby steps”?
Sure. We call this organic growth and it is how nearly every business starts off. Remember washing cars or mowing lawns for a few bucks? Next thing you know, your neighbor wants it done. That neighbor refers you to another neighbor and so on. Many businesses grow their clientele by word of mouth alone and are very successful. But they usually hit a brick wall. That’s where building a solid branding campaign helps. When you rely on partial branding or organic growth alone, you risk losing revenue from business you did not get because X% never discovered you or did not have their interest piqued when they interacted with your brand. And you cannot tally the lost revenue from those who perceived your current brand negatively and left your Web site without you ever knowing it. This is why it is so important to build the brand correctly. Why risk millions to save thousands?
Why do so many SMBs fail?
One reason is that companies do not allocate enough money for marketing. Successful and highly profitable SMBs know how to allocate adequate funding to marketing each year. SMBs realize that marketing, if done properly, brings back solid returns and vice versa — whereas not allocating enough in your budget for marketing could spell disaster. Think of marketing this way: It is a fundamental ingredient for profitability and growth.
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